Last week’s appearances of the country’s top bankers at the joint Oireachtas committee on finance highlighted one thing clearly.
Ireland's three largest banks – AIB, Bank of Ireland and Ulster Bank – are decidedly lukewarm about split mortgages. This is a form of restructuring that results in a large portion of a home loan being warehoused for repayment at a later date while the balance continues to be paid off as normal.
It is designed to allow borrowers get back on their feet through an affordable repayment schedule while giving the lender a decent shot at recouping a large part of their loan.
Permanent TSB, which is 99.2 per cent owned by the State, is the outlier of the Irish banks. Of the 21,000-plus solutions that it had provided to its arrears customers by September 3rd, it had offered 3,500 split mortgages. By contrast, AIB told the committee that it had 153 split mortgages in the system, while Bank of Ireland has more than 200.
This might not matter were it not for the fact that Central Bank of Ireland governor Patrick Honohan has made it clear that he believes split mortgages will be key in resolving the mortgage arrears crisis.
Yet of the 79,000 residential mortgage loans deemed to be restructured at the end of June, just 309 were split mortgages.
Sustainable solutions
Are the banks deliberately thumbing their noses at the regulator? Or is there another reason that in meeting the Central Bank's initial 20 per cent target for providing sustainable solutions to arrears customers by the end of June, split mortgages weren't a major feature?
What emerged at the hearings last week is that the three main banks have very different views on split mortgages.
AIB charges no interest on the warehoused portion of the loan; Bank of Ireland charges the full whack. Richie Boucher’s attitude is that someone has to bear the cost of servicing the loan, warehoused or not, and he’s not prepared for that to be his shareholders, which include the State as a 15 per cent shareholder in the bank.
Ulster Bank, meanwhile, prefers to operate a different model which it calls the “economic concession”. Under this model, a borrower has the interest rate on their entire mortgage reduced to just 0.5 per cent. About 1,000 of its customers are on this treatment, out of a total of 18,025 who are behind with their repayments by 90 days or more.
Ulster Bank chief executive Jim Brown said the rate would typically apply for three or five years but could run for the remaining life of the loan. He said when presented with the two options – split mortgage or economic concession – most customers were opting for the latter and he argued that arrears customers would pay less over the course of the loan by selecting this option.
Independent TD Stephen Donnelly praised Ulster for providing this "creative" solution. The bank clearly prefers to have the capital repaid on a regular basis rather than parking a large chunk of the loan in the hope that it gets repaid down the road.
Honohan wants the rules on the repayment of the split mortgage set down at the start of the arrangement and is clear the borrower should not have to repay more than the collateral in the house when it comes to paying the warehoused amount.
This is how it might work. A borrower owes €400,000 but can only afford the repayments on half that amount. The other €200,000 is warehoused for the remainder of the loan term. If, on maturity, the property is worth say €175,000, the Central Bank wants the lender to commit to writing off the surplus of €25,000.
The borrower would continue to have a lifetime interest in the property. So they can’t be forced out of their home but they would probably have to enter into a rental arrangement with the lender once the mortgage has expired.
Minimum living expenses
In May, Honohan said a split mortgage that requires the borrower to stay at the minimum living expenses level set down by the Insolvency Service of Ireland for decades, or that fails to make clear in advance what will happen in respect of the unserviced warehouse debt at maturity, can hardly be considered "sustainable".
He acknowledged that a major issue for lenders in assessing whether to offer a split mortgage is their ability to monitor improvements in the capacity of the borrower to make service payments.
Tracking those improvements is the main reason why income sharing repayment schedules are rare in banking around the world, he added.
It remains to be seen if Honohan, and his new deputy governor and head of financial regulation Cyril Roux, will make any moves to ensure that more split mortgages are offered by the banks. We should get some idea when Honohan makes his own appearance at the same committee on September 25th.
